Depending on who you ask, the answer to this question can vary. Banks see it as a way to improve customer satisfaction in an increasingly digital economy. Fintech startups see it as an opportunity to compete in a crowded market. Consumers see it as a more effective way to control their personal finance. All of these things are made possible by open banking, but the concept is much broader than that.
At its core, open banking is all about the free flow of data. External service providers can access consumer’s financial information securely, and in real time. The simplest example would be a personal finance application. Without open banking, you’d have to enter each transaction manually. In an open platform, the app could download transaction data directly from your accounts.
Open banking is only just starting to gain traction with major financial institutions. While there are some very real benefits from this concept, this is just the tip of the iceberg. In the near future, open banking has the potential to forever change our relationship with the banking industry.
Why We Need Open Banking
As consumers, we’re taught to protect our private financial information. Between the threat of identity theft and the news stories surrounding data breaches, it’s been made clear to us that privacy means security. With this mindset, it makes sense to us when banks restrict access to our data. At minimum, looking into your online bank account requires a secure password. In most cases, there are several additional layers of security in place.
There are several key disadvantages to this system. Consumers that choose to use multiple financial service providers face transaction delays, and the inconvenience of managing their money through multiple interfaces. This creates an incentive for consumers to stick with one banking service provider, and reduces the incentive for banks to price their services competitively.
Any industry that relies on financial data to make decisions is negatively impacted by a lack of access to essential information. Credit reports may summarize a potential client’s financial health, but an itemized list of transactions could better serve that purpose.
For Fintech companies, changing an industry that is dominated by proprietary, closed-source platforms create a huge barrier. For their technology to be adopted, they’re relying on banks to license it and implement it into their existing IT infrastructure.
Open banking allows information to be shared between entities quickly, efficiently, and securely. Implementing open standards will increase competition in the banking service industry, and provide consumers with the next generation of financial management tools. For banks, adopting new technologies will be a simple procedure. For startups, integrating into an existing system reduces deployment costs.
Conceptualizing Open Banking
The Open Data Institute (ODI) has been instrumental in developing the open banking standard. As a nonprofit organization, their objective is to help businesses utilize data to address global issues. The benefits of open banking had been highly publicized, but ODI was the first company to develop an open architecture.
To work out the details, the ODI established the Open Banking Working Group. Established in 2015, they were tasked with creating a framework that banks could use to develop their platform. Later that year, the framework was published along with a list of recommendations that could help bring this technology to market.
From Concept to Reality
Without regulation, it’s unlikely that banks would have every truly adopted an open standard. Open banking requires that institutions establish a common protocol for exchanging information, and all entities need to be fully compliant. The framework developed by the working group had potential, but it had yet to be adopted.
Implementing this technology would require time and resources, and many banks were reluctant to invest. However, legislation has ensured that open banking is being implemented in countries all over the world.
Open Banking Europe
As one of the most prominent legal framework supporting open banking, PSD2 policies set the global standard. This directive requires all European banks to implement an open API by January 31st. It outlines a framework based on the one developed by the working group, and provides a set of objectives.
The PSD2 open banking standard requires that banks provide access to identification information, transactional data, and product information to third parties. The objectives are designed to promote innovation, allowing service providers to utilize transaction data to create services that are personalized and accessible.
Open Banking UK
Shortly after the PSD2 came into effect, UK policy makers followed suit. The Competition and Markets Authority (CMA) published a report on the retail banking industry. In one of the biggest steps towards open banking, CMA authorities set some solid objectives for banks. They identified key targets for implementing open standards, and created The Open Bank Implementation Entity to enforce their guidelines.
The standards outlined by the CMA were taken directly from the recommendations made by the open banking working group. Should these standards be adopted by other countries, this could potentially lead to a global banking API .
Open Banking Australia
Although regulations have not been passed yet, open banking is on the horizon for Australia. A parliamentary committee released a report recommending that banks integrate an open API by July, 2018.
If approved, customers will be given full control over their data. Banks will be required to share it with anyone that clients authorize. The lower house committee is still debating the logistics of such a system. Once agreed, open banking could be a reality within one year.
Although Australia is a little behind, analysts predict that their transition to open banking will go smoothly. They can learn from the challenges that the European market faced, addressing problems before the system goes live.
How Open Banking Works
Open banking follows the same concepts that run the modern internet. At the core of the platform is an API. APIs are protocols and procedures that different applications can use to communicate with each other. Any service that needs to access your financial data can simply query your service provider and pull the information directly.
The main advantage of an API based system is security. Service providers won’t have to keep a copy of your data on hand. Your data is only stored in a single place, and can only be accessed with your authorization. Data is transmitted using an encrypted protocol so it cannot be intercepted by any unauthorized users.
On a more advanced level, APIs allow the features of one service to be integrated with another. A groundbreaking new payment technology could quickly be integrated into another product your business sells. For consumers, this means that the frustration of using multiple financial service providers is removed, as all services can be accessed from an all-inclusive interface.
This open banking definition might not seem all that exciting. After all, it’s simply a set of rules. But these rules are a platform that existing businesses can use to improve the value of their products. Thanks to the hard work of the pioneers who developed the first banking APIs, the visionaries who created a universal framework for open banking, and the legislators to changed market conditions to facilitate growth, the next few years will be an exciting time for banking.
What’s Next for Open Banking
Currently, the framework is being implemented to make open banking a reality. What happens after it goes live?
To answer this question, consider how data has made an impact on other industries. Agriculture might not be the first thing that comes to mind when you think of a high-tech industry, but data plays a large role.
Soil composition, weather, and a variety of other factors influence the efficiency of a farm. Experienced farmers do a pretty good job of understanding what their crops need, but data analytics got rid of the guesswork. Core growth factors can be electronically tracked, and systematically analyzed. With the right information, farmers were able to make better decisions. Operating costs were reduced, yields improved, and fertilizer was used more effectively.
With the right data, any business process can be made more efficient. For financial service providers, open banking data means that they’ll be able to better understand the needs of their clients. When they understand what kinds of products consumers need, they are better equipped to create them. Instead of having to appeal to a broad and dynamic market, companies can offer niche specific products that target a smaller segment of customers. By developing these products more efficiently, smaller service providers can be financially competitive with larger players.
As the banking product market rapidly expands, how will consumers know what to choose? Open Banking Data makes the process simple. When comparison shopping, consumers will be able to find the costs of all available products in a single location. Improving access to product information gives consumers the ability to make cost effective choices, rewarding efficient companies with their business.
The next few years are going to be instrumental in the development of the open banking concept. These changes might take a little time to come into effect, but companies from all over the world have positioned themselves to take advantage of these opportunities the moment they arise.